Archives for December 2013

One of these things is not like the other …

One of these things is not like the other …

Courtesy of

This is the time when everyone is making financial and economic forecasts for the upcoming year and beyond. Here is a simple forecast from Sober Look that did not require much analysis. By the end of 2014, student loan balances held by the federal government will exceed $850 billion and by the end of 2015 the number will be above a trillion. And this is on top of some half a trillion of loans that are not directly held but guaranteed by the federal government.

Source: FRB

So what? We've gotten numerous e-mails asking this question. The problem of course is government-subsidized and rising consumer debt burden – all on the back of the taxpayer. When the government is involved on such a large scale, there are usually unintended consequences and market distortions (elevated tuition costs for example). But it's the borrowers who are stretched to the limit due to outsize student loans and limited employment opportunities that is the growing problem – both for the borrowers and the taxpayers.

Remember the old song from Sesame Street: "One of these things is not like the other…"? The chart below from Wells Fargo shows the one thing that is definitely not like the other.

Source: Well Fargo

Happy New Year!


Happy New Year (and Some British Humor)

Courtesy of Mish.

Looking for a laugh? Play the video below “Putting Out the Dog

Link if video does not play: Mrs. Brown’s Boys

Happy new year to you and your loved ones!

Wishing 2014 to be your best year ever.

Mike “Mish” Shedlock

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Apple Denies Working With NSA on iPhone Backdoors; NSA Toolbox Catalog; Celebrate the New Year: 1984

Courtesy of Mish.

Today Apple denied creating backdoors on the iPhone for the NSA to exploit. First let’s review some articles that preceded the denial.

Within the last few days came numerous reports NSA Reportedly Has Total Access To The Apple iPhone.

Back in September, Der Spiegel online reported iSpy: How the NSA Accesses Smartphone Data

AppleInsider notes “New documents revealed on Monday show the U.S. National Security Agency has the capability of deploying software implants on Apple’s iPhone that grants remote access to on-board assets like SMS messages, location data and microphone audio.

NSA Toolbox

Please consider Der Spiegel article Shopping for Spy Gear: Catalog Advertises NSA Toolbox by Jacob Appelbaum, Judith Horchert and Christian Stöcker.

After years of speculation that electronics can be accessed by intelligence agencies through a back door, an internal NSA catalog reveals that such methods already exist for numerous end-user devices.

According to Juniper Networks’ online PR copy, the company’s products are “ideal” for protecting large companies and computing centers from unwanted access from outside. They claim the performance of the company’s special computers is “unmatched” and their firewalls are the “best-in-class.” Despite these assurances, though, there is one attacker none of these products can fend off — the United States’ National Security Agency.

A document viewed by SPIEGEL resembling a product catalog reveals that an NSA division called ANT has burrowed its way into nearly all the security architecture made by the major players in the industry — including American global market leader Cisco and its Chinese competitor Huawei, but also producers of mass-market goods, such as US computer-maker Dell.

A 50-Page Catalog

These NSA agents, who specialize in secret back doors, are able to keep an eye on all levels of our digital lives — from computing centers to individual computers, and from laptops to mobile phones. For nearly every lock, ANT seems to have a key in its toolbox. And no matter what walls companies erect, the NSA’s specialists seem already to have gotten past them.

This, at least, is the impression gained from flipping through the 50-page document. The list reads like a mail-order catalog, one from which other NSA employees can order technologies from the ANT division for tapping their targets’ data. The catalog even lists the prices for these electronic break-in tools, with costs ranging from free to $250,000….

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Why Did the Justice Department Kill the Madoff Subpoena Against JPMorgan?

Courtesy of Pam Martens.

Attorney General Eric Holder Testifying Before the House Judiciary Committee on May 15, 2013

Since December 16, major business media have failed to dig deeper into a potentially blockbuster story involving the Justice Department’s refusal to honor a Wall Street regulator’s request for a subpoena against JPMorgan Chase to obtain Madoff related documents the firm was refusing to turn over. JPMorgan Chase was Madoff’s banker for the last 22 years of his fraud. The Trustee in charge of recovering funds for Madoff’s victims, Irving Picard, said in a filing to the U.S. Supreme Court this Fall that JPMorgan stood “at the very center of Madoff’s fraud for over 20 years.”

It’s a big story when a serial miscreant like JPMorgan – which has promised its regulators to change its jaded ways in exchange for settlements – risks obstruction of justice charges by denying one of its key regulators internal documents. It becomes an explosive story when the Justice Department, the highest law enforcement agency in the land and the regulator’s only source of help in enforcing a subpoena for the documents, sides with the serial miscreant instead of the regulator.

The story began on December 16 when Scott Cohn of CNBC posted a story with this headline: “Feds Probe JPMorgan Interference in Madoff Case.” The article revealed that the Office of the Comptroller of the Currency (OCC), a JPMorgan Chase regulator and part of the U.S. Treasury Department, had been so riled by JPMorgan’s refusal to turn over documents related to what its employees knew about the Madoff fraud that it referred the matter to the Treasury Department’s Inspector General.

The article quotes Richard Delmar, legal counsel to the Inspector General, who explains that “This office was looking into allegations made by JPMC’s regulator, the Office of the Comptroller of the Currency (OCC) that its oversight of the bank was being impeded, specifically with respect to the bank’s provision of banking services to Madoff.”

The Inspector General’s office clearly believed there was merit to the OCC’s claim because it issued its own administrative subpoena for the documents, according to the CNBC story. JPMorgan refused that request as well, leading the Inspector General to ask the Justice Department to enforce the subpoena – a request it refused to honor.

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France in Review: Perfect Track Record of Economic Ineptitude

Courtesy of Mish.

In 2013 France stood out as the perfect model of economic ineptitude. It’s very difficult to be perfect at anything, even failure. France managed. Here are some headlines.

  1. December 19, 2013: 50 Foreign Companies Operating in France Sound the Alarm
  2. December 16, 2013: Sharp Decline in France PMI; Private Sector Employment Drops 21st Time in 22 Months
  3. December 10, 2013: French Industrial Output Drops Unexpectedly; France Finance Minister in Complete Denial; Expect the Unexpected
  4. December 04, 2013: Taxed to the Point of No Recovery; France Plans Tougher “Exit Tax” November 17, 2013: France Tax Revenues €5.5 Billion Lower than Expected; Poll Shows 92% Do Not Believe Hollande’s Tax Promises 
  5. November 29, 2013: Montebourg Targets UGAP Over “Made in France” 
  6. November 03, 2013: “France is Not a Cash Cow”; Riots Over Ecotax Continue; Is Anyone Happy? 
  7. October 25, 2013: Made in France: Montebourg Ridiculed in Text and Pictures; France Goes After “Red Bull” Energy Drinks to Finance Social Security
  8. October 18, 2013: Still More France Economic Idiocies: New Rent Price Controls, Mandatory Rental Insurance, “Unfair Competition” Laws
  9. October 10, 2013: Law of Career Security: France’s Minister of Digital Economy Orders Telecom Companies “to be Virtuous and Patriotic” and to Use Alcatel-Lucent to Prevent Layoffs
  10. October 03, 2013: France Vows to “Save the Bookstores”, Fixes Price of Books, Bans Free Shipping by Amazon
  11. August 20, 2013: Socialist Delusion: France Promises Full Employment, a Third Industrial Revolution, an Affordable Housing Utopia in 10 Years
  12. May 31, 2013: Bad Weather in France to Blame For …
  13. May 30, 2013: Simmering Feud Between France and Germany Erupts Into Verbal Warfare; France Tells Brussels to Shove It
  14. May 24, 2013: France Private Sector Implosion Continues
  15. May 15, 2013: Triple Dip Recession in France; It’s Not the Weather
  16. May 11, 2013: Germany France Feud Erupts Again; German Central Bank Head Blasts France
  17. April 02, 2013: Hollande Orders Employers to Pay 75% Tax; Top Executives Join France Exodus
  18. March 21, 2013: Le Monde Headline “No, France is Not Bankrupt”
  19. March 12, 2013: Housing Construction in France Lowest in 50 Years; Hollande Responds With Measures to Support Building “For the Public Good”
  20. March 10, 2013: France Postpones Austerity and Deficit Targets for Rest of 2013
  21. February 27, 2013: France Unemployment Highest Since 1997
  22. February 21, 2013: France Sinks Further Into Gutter; PMI Accelerates to 4-Year Low; “Core” of Europe Now Consists of Germany Only
  23. February 19, 2013: Incredible Letter from CEO of Titan to France Minister of Industrial Renewal, Blasting French Unions and USA: “How Stupid Do You Think We Are?”
  24. January 28, 2013: Hard Times: Dijon France Sells Half of Prized Wine Collection to Help Those Appealing for Social Aid

I will post my thoughts (not just links) on the global economy shortly.

Mike “Mish” Shedlock 

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Exxon Shares up on Rosneft Deal

By Charles Kennedy of Oil Price 

As ExxonMobil (XOM) predicts a 35% increase in global energy demand by 2040, the company’s shares have soared to a new 15-month high on a deal with Russia’s Rosneft and news of declining unemployment claims.

It’s been a stellar year for Exxon Mobil, with shares rising 1.6% to $100.81 in intra-day trading on 26 December, and increasing 16% over the course of this past year.

Exxon is now one of the cheapest Dow stocks and while its earnings and revenues dropped this year, it still managed to outperform the industry average.  

The rise in share prices was a response to Exxon’s 26 December announcement that it was forming a joint venture with Russian oil and gas giant Rosneft NK OAO to launch a pilot program to drill horizontal wells and revive old wells in Western Siberia.

Earlier this year, Exxon’s undervaluation, coupled with expected rises in oil prices, led Warren Buffet to purchase a $3.4 billion stake in the company.

In its annual outlook, Exxon said that more efficient, energy-saving programs and technologies, increased use of natural gas and other less-carbon intensive fuels, and continued development of advanced exploration and production technologies will support a 35% increase in global energy productivity by 2040.

Crude oil demand is expected to increase 25%, according to the outlook, led by increased commercial transportation activity, and will be met through technology advances that enable deepwater production and development of oil sands and tight oil.

The outlook also noted that unconventional gas now accounts for 40% of the world's resource base, and is expected to represent 65% of global gas production growth to 2040, led by North America, according to the Oil & Gas Journal.

Most of the projected demand growth will occur in developing nations, while industrialized nations focus on improving energy efficiency. 


Big opportunities are lining up all over the energy sector right now. And energy investors are facing potential windfalls caused by the massive increases in spending.  Take a free 30-day trial to OilPrice's Premium Newsletter to learn more.

When it comes to current account imbalances, one nation stands out

Courtesy of

Over the past few decades there has been a great deal of focus on the large trade imbalance between the US and Asia – first with Japan and more recently with China. While that is still an issue, we may be facing a new imbalance that is starting to grab the attention of politicians, economists, and the markets. The chart below shows the current account balance as a percentage of each nation's GDP. And one nation clearly stands out – Germany.

Source:, Merrill Lynch

According to Merrill Lynch the massive German current account surplus will manifest itself in two major ways:

1. It is bound to generate friction within the Eurozone, particularly as German assets appreciate, while the periphery is experiencing deflationary pressures.

Merrill: – Germany’s surplus holds a deeper meaning for financial markets in 2014. First, it signifies the difficulty faced by ECB monetary policy. It should not be easy to achieve a balance between Germany with its growing current account surplus and where real-estate prices have started turning up [see Twitter chart from the ECB], and the periphery countries that are facing disinflation despite having somewhat reduced their current account deficits as a tradeoff for low growth. Whether it happens in 2014 or not, eurozone fiscal policy discussions will be necessary at some point, though politically difficult. Eurozone financial issues could still destabilize global financial markets at some point in the future.

2. This imbalance is likely to have an impact on the currency markets, especially with respect to the yen.

Merrill: – The second implication is for the exchange rate issue with Japan. While Germany’s current account surplus has expanded, it is Japan’s current account that has deteriorated sharply. Comparing Japan’s balance of trade in 2010 and 2013 (Jan- Nov for both years), reveals that it has fallen by ¥16.1tn (3.2% of GDP). Around half (¥7.5tn) of this is in non-energy trade. Of that ¥7.5tn, more than ¥2tn is due to trade with the EU, and the rest is versus Asia. Japan is expected to post a ¥11-12tn (1.2- 1.4% of GDP) trade deficit for 2013. Although its income balance will keep the current account positive, the surplus will likely be less than 1% of GDP. 

…the change in current account imbalances seems consistent with our FX strategy team’s projection that the leeway for a rebound in the JPY is relatively limited versus the EUR, and the JPY should continue to weaken versus USD in 2014.

2014 should see an increased focus on this topic, as Germany's current account surplus continues to stand out.

Fast Facts: Bad News for Housing–Two Straight Months of Declining Sales

Courtesy of Lee Adler of the Wall Street Examiner

The NAR’s Pending Home Sales Index had its second straight year to year decline in November. This index represents contracts signed during the month. Most result in closed sales within 30 to 60 days. This is as close as we get to a real time barometer of actual housing market sales volume, although Redfin, an online real estate brokerage, reports a sample of the 19 big markets they represent a little earlier in the month. That measure also declined on an annual basis for two straight months. It may be time to start worrying that the pitiful housing “recovery” under way for two years has reached its limit.

Monthly Home Sales - Click to enlarge

Monthly Home Sales – Click to enlarge

The seasonally adjusted headline number reported by the NAR, and dutifully regurgitated by the mainstream media, showed a rise of 0.2% month to month. That was weaker than the consensus expectation of economists of a 1% rise, but it does not capture the reality that the actual change from October was much worse than average. As is often the case, the seasonally finagled number failed to accurately reflect the reality.

November is always a weak month, but the 17.9% decline for the month was the worst November since November 2009, which was exacerbated by the expiration of an earlier Federal tax credit to home buyers which had stolen sales from the future. This November’s decline wasn’t quite as bad a drop as the 22% decline in November 2008 at the worst point in the housing crash, but it was worse than the 17.2% drop in November 2007, in the earlier months of the collapse.

Home Inventory to Sales Ratio - Click to enlarge

Home Inventory to Sales Ratio – Click to enlarge

Does this mean that recently bubbly house prices will come crashing down? Maybe. Inventories are not dropping like they usually do in the winter. Excluding 2010, which was skewed by the second home buyers’ tax credit, the inventory to sales ratio has turned up for the first time since 2008. It’s still at a historically low level, however. We may have to wait for the spring buying season to get a better idea of whether the trend of the supply demand balance has entered a sustained shift.

Housing Price Measures - Click to enlarge

Housing Price Measures – Click to enlarge

Real time aggregated listing prices reported by have accurately shown current price trends, subsequently confirmed by lagging sales data. Late December data shows a sharper than usual seasonal drop in asking prices nationally, but the overall uptrend is intact.

Econ Chart Update- Single Family Starts Outrun Sales- Construction Employment Lags, Multifamily Booms 

Get regular updates on the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. 

TruPS CDOs Explained – With Charts

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Over the past two weeks, Trust Preferred (or TruPS) CDOs have gained prominent attention as a result of being the first, and so far only, security that the recently implemented and largely watered-down, Volcker Rule has frowned upon, and leading various regional banks, such as Zions, to liquidate the offending asset while booking substantial losses. But… what are TruPS CDOs, and just how big (or small) of an issue is a potential wholesale liquidation in the market? Courtesy of the Philly Fed we now have the extended answer.

First, some verbal perspectives – highlights ours:

Developed as a way to provide capital markets access to smaller banks, thrifts, insurance companies, and real estate investment trusts (REITs) by pooling the issuance of TruPS into marketable CDOs, the market grew to $60 billion of issuance from its inception in 2000 through its abrupt halt in 2007. As evidenced by rating agency downgrades, current performance, and estimates from our own model, TruPS CDOs are likely to perform poorly. Using data and valuation software from the leading provider of such information, we estimate that large numbers of the subordinated bonds and some senior bonds will be either fully or partially written down, even if no further defaults occur going forward. The primary reason for these losses is that the underlying collateral of TruPS CDOs is small, unrated banks whose primary asset is commercial real estate (CRE). During their years of greatest issuance from 2003 to 2007, the booming real estate market and record low number of bank failures masked the underlying risks that are now manifest. Another reason for the poor performance of bank TruPS CDOs is that smaller banks became a primary investor in the mezzanine tranches of bank TruPS CDOs, something that is also complicating regulators’ resolutions of failed banks.

Then cutting straight to the conclusion:

… the TruPS CDO market provides important insights into how markets respond to regulations; the symbiotic relationship between investment banks and rating agencies in developing models and ratings; how ratings are adjusted over time; and, most recently, how accounting rules have changed with the crisis and have been applied to valuing untraded securities.

The poor performance of TruPS CDOs is first and foremost a direct, and largely unanticipated, result of the financial crisis and the broad-based nature of the real estate downturn. Record low numbers of bank failures over the 2003-2007 period as well as the booming real estate market also help explain the concentrations of issuance volume in these years. The very favorable market conditions combined with good returns relative to other structured finance products also may explain why banks became primary investors in securities in their own market.

Having said this, the very favorable market conditions masked underlying risks. Since bank TruPS CDOs were made up mainly of debt of banks too small to be rated, and since these banks largely invested in commercial real estate (CRE), these deals were, in effect, indirect investments in unrated and deeply subordinated CRE bonds. By comparison, even the riskiest of the synthetic mezzanine subprime CDOs were composed of bonds at least initially rated investment grade.

But having banks both issue TruPS and hold each other’s debt greatly increased those risks, as did the tendency to include the same TruPS issuers in many different CDOs. Banks turned out to be the primary customer for the lower-rated tranches of TruPS CDOs, many of which all models estimate are likely to be fully written down. The rationale for such holdings appeared to be that banks were investing in their own industry, which they ostensibly knew the risks of better than others. While this may not be uncommon for such a niche class of securities, it undoubtedly increased these risks once the downturn commenced. We show that banks’ being the primary investors of the TruPS CDOs in their own industry was publicly reported in the investment banking literature as early as 2004, but none of the major players, dealers or  rating agencies, expressed any concerns or made significant model adjustments until after the TruPS CDO market came undone. Since ratings do not take into account the investor base of a deal, nor do rating agencies keep track of who investors are, this would have to fall to the dealers to police. These agents are conflicted when a primary motive is to generate business.

There was a regulatory arbitrage point to these investments as well. Banks that hold each other’s equity are not allowed to count these as capital, but no such restrictions were placed on TruPS CDO investments at banks, which are hybrid debt/equity TruPS. Here the opaqueness of the structure itself and the limited disclosure made it difficult for regulators to actually determine how to account for TruPS CDOs for regulatory accounting purposes. Had banks been required to deduct portions of their TruPS CDO investments from capital, this may have limited bank investments in TruPS CDOs, which, in retrospect, would not have been a bad thing.

Future TruPS CDO issuance was dead long before Dodd-Frank placed restrictions on TruPS as regulatory capital. More important is the highly uncertain future of existing deals. Defaulting BHCs have yet to resolve their TruPS, but this will have to be done at least by their fifth year of deferral, which is the limit to which they can defer without defaulting. Rating agencies are making a conservative assumption that all existing deferrals are leading to defaults with little or no recovery. This has created disagreements among analysts responsible for conducting valuations. More work needs to be done to determine how these deferrals will play out and what assumptions are most reasonable to make regarding recoveries. In the meantime, efforts to resolve defaulted bank TruPS claims could add greater clarity to assumptions on  recoveries so critical to loss forecasts.

… what is needed in ABS/MBS markets is objective, critical analysis from analysts and researchers who are not profiting in any way from new issuance. An important aspect of the development of the TruPS CDO market, and of structured finance markets in general, is the dominance of analysis by companies directly profiting from new issuance. This is not unusual, and, in fact, is necessary. Innovation is greatest with economic incentives, and this process should not be hampered by regulation. Having said this, a more critical analysis of these deals may well have uncovered the high-risk nature of these investments that appeared to be captured in the large spreads and exceptional amounts of subordination in the AAA-rated senior classes of TruPS CDOs. More important, as the above-mentioned market concentrations became clearer, rating agency and issuer pricing models should have taken more account of this.

They didn't, and the financial system collapsed. As for "objective, critical anslysis", why who needs that when one has paid-for professors like Craig Pirrong who have made a living of collecting "expert academic" fees simply to sign off on industry memoranda?

Anyway, enough words: here are the promised TruPS CDS charts and figures:

full Philly Fed working paper can be found here.

The Volcker Rule’s Major Miss & Kim Kardashian’s Bikini Bod

The Volcker Rule's Major Miss & Kim Kardashian's Bikini Bod

Courtesy of Nomi Prins

Something isn't always better than nothing.

(This piece originally appeared at Truthdig. Also, hat-tip to Pam Martens at www.wallstreetonparade.) 

The subject of heated debate in financial circles, the Volcker Rule, which was originally passed as part of the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, was finally approved by regulators. It will begin taking effect in April 2014 with full compliance required by July 2015. They say the devil is in the details. Regarding the Volcker Rule, the devil is in the details of its abundant exemptions. These include a laundry list of practices and businesses that mega-banks have performed under one roof, since the 1999 repeal of Glass-Steagall, as well as the myriad perks they won along the way to that power-consolidating event.

The Volcker Rule in its current form ostensibly focuses on mitigating the “excessive” risk of proprietary trading at banks (which it doesn’t do well). Worse, it leaves all the other risky trading related activity that poses a far greater systemic threat untouched, such as:

1) Market making—the ability of banks to trade on behalf of clients or eventual clients, which is how they make the bulk of their trading profits, and thus create risk.

2) Underwriting—the creation of securities that can contain multiple layers of financial complexity, such as the toxic assets at the heart of the recent crisis.

3) Hedging—or the desire of banks to “protect” themselves through trading, which is virtually impossible to detect from any other kind of trading.

4) Trading government bonds.

5) Organizing or offering hedge and private equity funds, which involves trading and was theoretically to be prohibited under the original intent of the Volcker Rule.

Other exclusions (yes, there are more) relate to the ability of banks to trade—proprietary or otherwise—within their brokerage arms (which are supposedly, but not actually, distinct from their deposit-taking arms) and insurance company arms (which have historically been eager buyers and accumulators of toxic assets).

The real danger of the Volcker Rule, though, isn’t just that it leaves the structure of Wall Street’s deposit-insured, security-distributing and market-making services intact. The danger is that Wall Street critics believe it makes a meaningful difference, that it’s an obvious road on the way to the Glass-Steagall reinstatement highway, and are thus not ranting and raving for it to be made stronger, even as the bank lobbyists and lawyers are making every effort to further weaken it.

The Volcker Rule Exclusions Are the Rule

Between effectiveness and legalese, you can drive an 18-wheeler of financial wizardry. And that’s even accepting the notion that proprietary trading was a key culprit in causing any major financial crisis, relative to nearly any other risk producing bank practice, which it wasn’t.

Even so, the banks have been lobbying for exemptions in this minimal attempt at regulation and won’t stop. Thus the eventual implemented rule will entail more pages of exemptions, particularly if the public remains oblivious to its current impotence to deter risk.

The Big Six banks (JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley) that control the majority of domestic deposits (and nearly all of U.S. derivatives) dangle them as financial hostages before complicit regulators, legislators and presidents. Too big to fail is about power, not size. These banks that sit atop the U.S. financial hierarchy by virtue of their legacy leaders having attacked 1933 Glass-Steagall regulations since the 1950s—piece by piece—own insurance companies, asset management companies, and brokerage or trading houses. They not only have access to an increasingly higher proportion of deposits, but also of pension and other funds, and insurance policies. That’s why one of the main things that banks did to weaken the possibility of broad restriction on any of their overall trading activities was to ensure these side financial service businesses would bear no restriction on trading, proprietary or otherwise, as per their exemptions in the Volcker Rule.

The Fed’s Language Game

The Volcker Rule won’t take full effect until July 15, 2015. Thus, the only thing that really happened on Dec. 10, 2013, was that the Fed announced that five federal agencies “issued final rules” to “implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘Volcker Rule’).”

As Fed Chairman Ben Bernanke remarked with great fanfare from a media hailing the mere “adoption of final rules” as a deterrent to Wall Street’s most heinous behavior (December is a slow news month):

“This provision of the Dodd-Frank Act has the important objective of limiting excessive risk taking by depository institutions and their affiliates. Getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond toextensive public comments” (italics mine).

It’s true that the Volcker Rule has the ability to limit “excessive risk,” but only in the most literal sense. Even Bernanke’s choice of words indicated focus on a small portion of risk—not systemic risk and not the risk that these banks remain too powerful to fail.

A more misleading aspect of Bernanke’s statement was that he claimed it took so long to get to this point because of the need to address “public comments.” Given the comparative length of bank-supportive pages relative to public-protecting ones, “public comments” essentially means bank lobbyist demands.

Separately, the Fed’s press release underscored the elements of trading the rule would not touch as much, if not more so, than what it would. The release stated that insured-deposit-taking banks would be prohibited from “engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on those instruments for their own account” plus be subject to “limits on investments in, or relations with hedge funds or private equity funds.” But it also stated that “the final rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds.” In addition, it clarified that “certain activities are not prohibited.” That these exclusions were prominent in the Fed’s press release speaks volumes to the parties the Fed is trying to coddle.

For good political measure, under the Volcker Rule, each bank must establish a compliance program. CEOs must attest to the program’s integrity, under the eye of an outside regulator—who will have to take all this pious restraint at face value.

Breaking It Down

The proposed rules tally 892 pages, of which the beginning contains exposition and outlines the crux of the rule prohibiting certain proprietary trading and hedge and private equity fund activities.

The exclusions kick in on page 55. Through page 79, we get their general aspects, with more specific details following on page 80. We wander through Underwriting Exemptions from pages 80 to 139, followed by a long section on Market-Making Exemptions from pages 140 to 317.

Then, we get a bunch of permitted hedge fund related activities that nearly negate the idea of the Volcker Rule altering the relationship of big banks to big hedge funds from pages 317 to 361. From this point, we meander through permitted trading in certain government and municipal securities (including in foreign bonds). There are a few antiquated categories that seem open to more lobbying through page 388.

Permitted Trading on behalf of clients gets 10 pages, as does permitted trading by a regulated insurance company. Permitted trading activities of a foreign banking entity get 23 pages.

Then we come to a section that sounds sort of regulatory, but is too obtuse to tell from pages 433 to 447. After a few pages of definitions as to what constitutes “High-Risk Asset” and “High-Risk trading strategy,” we get one page—one page!—on trading that could “Pose a Threat to Safety and Soundness of the Banking Entity or the Financial Stability of the United States.”

Another section of loopholes begins with covered fund activities on page 463. This is the stuff that allows banks to trade almost anything anywhere as long as it’s named in such a way as to avoid suspicion. Section 10 begins with prohibitions on banks buying or having certain relationships with a “Covered Fund.”

Pages 500 to 637 provide lists of exemptions to the above such as foreign public funds, insurance company separate accounts, loan securitizations (which were central to the subprime crisis), derivatives on loan securitization (ditto), venture capital funds (another word for private equity funds) and credit funds (which can hold all sorts of AIG-type credit derivatives).

In Section 11, we get another laundry list of permitted activities in conjunction with organizing covered funds, including “permitted risk-mitigating hedging activities” (and aren’t they all?) from pages 638 to 766. These also include foreign funds and insurance companies. To cap it off, we get some obligatory legal jargon about how to comply with whatever weakened rules remain from pages 767 to 882. C’est tout.

Something Is Not Always Better Than Nothing

For those people who think the Volcker Rule is a swipe at the banks and will reduce risk in the system, I urge you to reconsider. The Volcker Rule (and Paul Volcker, for whom it’s named) might have had good intentions, but the form it has taken, and was destined to take as I’ve written before, is a placation. It is not substantive reform, or even the right path.

Only a resurrection of Glass-Steagall will truly reduce the risk mega-banks pose to our economic lives. The multiple decades of regulation assassination, the combining of financial services from insurance policies to our pension funds, the epic leverage in the banking system as part of the high-stakes game of global profit, the enabling of the derivatives market to reach many times the world’s GDP, disproportionally controlled by the Big Six U.S. banks—are all time bombs of financial devastation.

This immense power in the hands of the Big Six banks and their leaders is dangerous to all of us, whether we believe that something like the Volcker Rule or Dodd-Frank represents true reform or not. Without curtailing that power, through a full separation of deposits and loan taking services from any other kind of trading and security creation engine or other form of financial service—the intent of the original Glass-Steagall Act—we are not safe. There will be bigger and broader crises.

Our apathy is exactly what the banks, their CEOs, their lawyers and their lobbyists count on. They depend on citizens getting bored and glassy-eyed when a financial term is mentioned and turning to stories about Miley Cyrus twerking or Kim Kardashian’s bikini bod instead. They rely on journalists not reading between the lines or even tabulating the lines. They bet that most legislators (excluding Sens. Elizabeth Warren and Bernie Sanders) will focus anywhere else, because they can out-complicate the lingo. They are confident that the population will continue to furnish them chips on the global betting table. That is our current system. That is the system that must be abolished through the strict re-deployment of Glass-Steagall. We—all of us—have too much at stake to be blindsided by anything else.

Joke Headline of the Day: “Pending Home Sales Rise”; Five Housing Headwinds

Courtesy of Mish.

I was perusing online stories about today’s release of pending homes sales data from the National Association of Realtors. Here are a few sample headlines.

NAR: Pending Home Sales Edge Up in November
CNBC: US pending home sales rise 0.2 percent
Calculated Risk: Pending Home Sales Index increased 0.2% in November
Forbes: Pending Home Sales Tick Up In November, First Time In Five Months
Reuters: U.S. pending home sales end slide, hint at stabilization
Fox Business News: Pending Home Sales Rise Slightly, Miss Street View

One Headline Title Stood Out

Zero Hedge: Pending Home Sales Plunge At Fastest Pace Since April 2011

It took about one second to understand the discrepancy.

All but the ZeroHedge headline (not necessarily the articles) ignored the NAR statement (see first link) “The Pending Home Sales Index,* a forward-looking indicator based on contract signings, inched up 0.2 percent to 101.7 in November from a downwardly revised 101.5 in October, but is 1.6 percent below November 2012 when it was 103.3.

ZeroHedge has a chart that shows just that.

Pending Home Sales Year-Over-Year

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Presenting The Definition Of Irony

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

The trapped-in-the-Antarctic-ice Australian research vessel's mission, among others, is to examine the effect of global warming on a receding Antarctic ice shelf…

(h/t @Pedlar7)

Via The Spirit of Mawson blog (the research blog),

"Until recently it was thought this ice sheet was stable, sitting on the continental crust above today’s sea level. However there is an increasing body of evidence, including by the AAE members, that have identified parts of the East Antarctic which are highly susceptible to melting and collapse from ocean warming.

…The effects of this marked shift in westerly winds are already being seen today, triggering warm and salty water to be drawn up from the deep ocean, melting large sections of the Antarctic ice sheet with unknown consequences for future sea level rise"

Judge Bars San Jose from Imposing Voter-Approved Pension Cuts; Hollow Victory for Unions

Courtesy of Mish.

On December 24, a state court judge barred the city of San Jose, California, from imposing voter-approved pension cuts on current municipal worker.

San Jose Mayor Chuck Reed, a Democrat, encouraged voters in his city to back municipal pension cuts he proposed as part of last year’s Measure B, which drew 70 percent support at the polls. The unions challenged the measure, leading to Judge Lucas’ ruling in Santa Clara County Superior Court. Her decision is likely to be appealed.

In her “tentative” ruling, dated from last week but publicly released on Monday, Lucas said the city was entitled under the ballot measure to cut workers’ pay to save money, but she held that vested pension benefits were protected by state law and thus off limits.

Reed is pressing for a statewide ballot initiative next year that would give cities across California the authority to reduce pension benefits.

In a statement, Reed welcomed the judge’s ruling on pay cuts, but added: “Unfortunately, the judge’s decision to invalidate certain portions of Measure B also highlights the fact that current California law provides cities, counties and other government agencies with very little flexibility in controlling their retirement costs.”

Hollow Victory

The pension ruling was hailed by union advocates but not the wage cut ruling. Both sides are likely to appeal aspects of the ruling. Should the ruling stand as is, unions will come to regret their victory.

Voters Had Enough of Unions

Reed will press the matter further, in a statewide initiative. And sentiment suggests voters have finally had enough of unions.

However, one must expect the teachers’ unions, the police and fire unions, and every other public union in the state to spend massive amounts of money hoping to defeat the proposition.

For California public-union sentiment details, please see Voters Take Negative View of Labor Unions; Liberals in Favor of Strikes (Until Strikes Happen); Aging Population an Anti-Union Force?

Should Reed’s initiative pass and be struck down by the courts, Reed can shove it straight down the union’s throats by declaring bankruptcy.

Unlike the mayoral economic illiterates in Vallejo and Stockton (who could have and should have slashed pension benefits in bankruptcy), it’s pretty clear Reed would do just that….

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What Blows Up First? Part 1: Europe

Courtesy of John Rubino.

2013 was a year in which lots of imbalances built up but none blew up. The US and Japan continued to monetize their debt, in the process cheapening the dollar and sending the yen to five-year lows versus the euro. China allowed its debt to soar with only the hint of a (quickly-addressed) credit crunch at year-end. The big banks got even bigger, while reporting record profits and paying record fines for the crimes that produced those profits. And asset markets ranging from equities to high-end real estate to rare art took off into the stratosphere.

Virtually all of this felt great for the participants and led many to conclude that the world’s problems were being solved. Instead, 2014 is likely to be a year in which at least some – and maybe all – of the above trends hit a wall. It’s hard to know which will hit first, but a pretty good bet is that the strong euro (the flip side of a weakening dollar and yen) sends mismanaged countries like France and Italy back into crisis. So let’s start there.

The basic premise of the currency war theme is that when a country takes on too much debt it eventually realizes that the only way out of its dilemma is to cheapen its currency to gain a trade advantage and make its debts less burdensome. This works for a while but since the cheap-currency benefits come at the expense of trading partners, the latter eventually retaliate with inflation of their own, putting the first country back in its original box.

In 2013 the US and especially Japan cheapened their currencies versus the euro, which was supported by the European Central Bank’s relative reluctance to monetize the eurozone’s debt. The following chart shows the euro over the past six months:

Euro dec 2013

For more details:

Euro rises to more than 2-year high vs. dollar; yen falls
The euro jumped to its strongest level against the dollar in more than two years on Friday as banks adjusted positions for the year end, while the yen hit five-year lows for a second straight session.

The dollar was broadly weaker against European currencies, including sterling and the Swiss franc. Thin liquidity likely helped exaggerate market moves.

The European Central Bank will take a snapshot of the capital positions of the region’s banks at the end of 2013 for an asset-quality review (AQR) next year to work out which of them will need fresh funds. The upcoming review has created some demand for euros to help shore up banks’ balance sheets, traders said.

“There’s a lot of attention on the AQR, and there’s some positioning ahead of the end of the calendar year,” said John Hardy, FX strategist at Danske Bank in Copenhagen.

Comments from Jens Weidmann, the Bundesbank chief and a member of the European Central Bank Governing Council, also helped the euro. He warned that although the euro zone’s current low interest rate is justified, weak inflation does not give a license for “arbitrary monetary easing.

The euro rose as high as $1.3892, according to Reuters data, the highest since October 2011. It was last up 0.3 percent at $1.3738.

The currency has risen more than 10 cents from a low hit in July below $1.28, as the euro zone economy came out of a recession triggered by its debt crisis.

Unlike the U.S. and Japanese central banks, the European Central Bank has not been actively expanding its balance sheet, giving an additional boost to the euro.

Here’s what a stronger euro means for France, the second-largest and arguably worst-managed eurozone country:

French Economy Contracts 0.1% In Third Quarter
The final estimate of France’s gross domestic product, or GDP, in the third quarter remained unchanged at the previous estimation of a contraction of 0.1 percent, indicating that the euro zone’s second-largest economy is struggling to sustain the rebound it witnessed in the second quarter with a growth of 0.6 percent.

The third-quarter GDP growth was in line with analysts’ estimates. According to data released on Tuesday by the National Institute of Statistics and Economic Studies, the deficit in foreign-trade balance contributed (-0.6 points) to the contraction in the third quarter, compared to the positive (0.1 percent) contribution made in the preceding quarter.

Some thoughts
At the beginning of 2013, most of the eurozone was either still in recession or just barely climbing out. Then the euro started rising, making European products more expensive and therefore harder to sell, which depressed those countries’ export sectors and made debts more burdensome. So now, under the forced austerity of an appreciating currency, countries like France that were barely growing are back in contraction. And countries like Greece that were flat on their back are now flirting with dissolution.

Recessions – especially never-ending recessions – are fatal for incumbent politicians, so pressure is building for a European version of Japan’s “Abenomics,” in which the European Central Bank is bullied into setting explicit inflation targets and monetizing as much debt as necessary to get there. The question is, will it happen before the downward momentum spawns political chaos that spreads to the rest of the world. See Italian President Warns of Violent Unrest in 2014.

Visit John’s Dollar Collapse blog here >

Is the New York Fed Too Deeply Conflicted to Regulate Wall Street?

Courtesy of Pam Martens.

William C. (Bill) Dudley, President of the Federal Reserve Bank of New York

The Federal Reserve System that is charged with setting monetary policy in the United States consists of a Board of Governors in Washington, D.C. and 12 regional Federal Reserve Banks. The Board of Governors functions as an independent government agency – its Board is appointed by the President of the United States but its funding comes from the regional Federal Reserve Banks.

Slowly, like a tiny Goldfish in a large tank of water that grows over time into a monster fish capable of clobbering anything else placed in the tank, one of the 12 regional Federal Reserve Banks has obtained unique powers not shared by the 11 other regional Federal Reserve Banks.

This is just a partial list of how the New York Fed is unique among its peers:

The President of the New York Fed sits permanently on the Federal Open Market Committee (FOMC). The Presidents of the other 11 regional banks rotate on the FOMC;

Although there is no law requiring that the New York Fed should be the sole regional Fed Bank to conduct the open market operations of the FOMC, it has uniquely served in this function since 1935;

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Toxic Smoke Cloud Engulfs Greece; Six Years of Relentless Recession; Horrific Statistics

Courtesy of Mish.

Please consider a mass of grim statistics regarding Greece, via translation from the El Pais article: Ruined Greece takes the helm of the EU in the first half of 2014.

On January 1, Greece assumes the rotating presidency of the European Union in a state close to suffocation, not only via austerity adjustments since 2010, but also literally, by a toxic cloud fueled by wood fires that replace conventional heating.

The beret dense smog that grips these days Athens or Thessaloniki is also a metaphor for the political gridlock: the government insists on not lowering the tax on heating oil to intractable limits for broad social layers, but a group of 41 deputies of the conservative New Democracy (ND), rector of the bipartite Executive, has unsuccessfully raised a parliamentary motion to reduce it. An authentic rebellion aboard the party of Prime Minister Andonis Samaras. ND and Pasok socialist now number just 152 seats in a House of 300, and the rebel MPs representing about one-third in the ranks of ND.

The mutiny of the conservatives is just the penultimate chapter of an intestine, economic, but with clear political implications, the result of six years of recession and unfathomable weariness of citizenship to the endless cuts crisis.

Horrific Statistics

  • A 27.4% unemployment (nearly 52% among those under 24 years)
  • 3.8 million Greeks living in poverty or social exclusion in 2012 (400,000 more than the previous year)
  • 350,000 households without electricity for non-payment bills
  • 30% of the population have no access to public health care
  • Virtual paralysis of the universities, which since September run almost unattended by the dismissal of officials
  • Three killed by asphyxiation because of home fires for warmth
  • Four out of five blocks of flats facing the winter without heating due to inability to afford it
  • 21 continuous quarters recession
  • 34.6% of the Greek population at risk of poverty or social exclusion

Political Setup

  • SYRIZA, leads most polls of likely voters ahead of ND
  • Neo-Nazi Golden Dawn caress between 9% and 11% of the votes and consolidated as the third political force
  • Only 33% of citizens believe possible ND victory if the election were held today
  • The once mighty Pasok, houses more than a trashy expectations 5% support, compared with 44% of votes in 2009

How much longer the “New Democracy” government of Prime Minister Andonis Samaras can hang together remains to be seen.

Should Samaras lose a vote of confidence for any reason, the Greek house of debt that that cannot and will not be paid back all comes crashing down.

For those counting, Greece received 240 billion euros in aid, in a foolish attempt by the Troika to keep Greece in the eurozone. Most of the loan has been earmarked for the recapitalization of banks and the payment of interest on the debt, which now accounts for 157% of GDP.

Germany and the ECB are adamant there will not be writedowns on that debt. Both are in fantasyland.

Default, accompanied by a messy eurozone breakup awaits.

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Shock Therapy Can ‘Erase’ Bad Memories, Brain Researchers Show

By Helen Shen, Huffington Post

In the film Eternal Sunshine of the Spotless Mind, unhappy lovers undergo an experimental brain treatment to erase all memories of each other from their minds. No such fix exists for real-life couples, but researchers report today in Nature Neuroscience that a targeted medical intervention helps to reduce specific negative memories in patients who are depressed.

"This is one time I would say that science is better than art," says Karim Nader, a neuroscientist at McGill University in Montreal, Canada, who was not involved in the research. "It's a very clever study."

The technique, called electroconvulsive (ECT) or electroshock therapy, induces seizures by passing current into the brain through electrode pads placed on the scalp. Despite its sometimes negative reputation, ECT is an effective last-resort treatment for severe depression, and is used today in combination with anaesthesia and muscle relaxants.

Marijn Kroes, a neuroscientist at Radboud University Nijmegen in the Netherlands, and his colleagues found that by strategically timing ECT bursts, they could target and disrupt patients' memory of a disturbing episode.

A matter of time

The strategy relies on a theory called memory reconsolidation, which proposes that memories are taken out of 'mental storage' each time they are accessed and 're-written' over time back onto the brain's circuits. Results from animal studies and limited evidence in humans suggest that during reconsolidation, memories are vulnerable to alteration or even erasure.

Keep reading Shock Therapy Can 'Erase' Bad Memories, Brain Researchers Show.

Sabrient’s Baker’s Dozen for 2014

If you missed Sabrient's Baker's Dozen last year, here's your chance to check it out for 2014. 

Sabrient's annual Baker's Dozen Portfolio is hands down their most popular product.

And why not? It's a gift that keeps on giving!

Baker's Dozen 2013, published in January and meant to be held for 12 months, is on track to be the best gift thus far—the portfolio is up more than +52% with three weeks left in the year!

Since the first publication in 2009, the Baker's Dozen has outperformed the S&P 500 Index by an average of +12.9% per year. Here are the stats:

What Makes the Performance of the Baker's Dozen So Outstanding?

It's a combination of Sabrient's powerful quantitative ranking system and the expert tough of Sabrient's Chief Market Strategist David Brown, Director of Research Donn Vickrey, Associate Director of Research Nick Gibbons, and their research team.

They begin with the 50 highest ranked stocks in the Sabrient database, as determined by a special quantitative GARP (growth at a reasonable price) strategy. You won't find many household names in a Baker's Dozen portfolio because our system allows us to discover relatively unknown stocks with high growth potential but at a reasonable price.

David and his team carefully review each of the 50 semifinalists and select the final 13 stocks based how well they fit the profile for over-performance during the coming year.

Baker's Dozen 2014

Sabrient's sixth annual Baker's Dozen portfolio will be launched on January 13, 2014. For more information see our FAQ or sign up here.

Daily price data underestimates stock beta

Courtesy of

Those who manage market neutral equity portfolios spend a great deal of time estimating betas (see definition) of individual holdings. The goal is to measure the amount of index-equivalent exposure needed to offset the "market-sensitive" component of each stock's volatility. This often becomes more of an art than a science, with dozens of different (and often proprietary) approaches. These include splitting the measure into the "up-side" and the "down-side" beta based on observations that some companies' share price responds differently to rising vs. falling markets. Another approach used by some risk managers is to look at "stress beta" – a measure of how a stock responds to extreme movements in the market.

There is however one overriding mistake that many portfolio managers make in their estimates of beta. For those who have holding periods of longer than a day, it probably does not make sense to use daily movements in stock prices to estimate beta. Daily data contains a significant amount of noise that tends to dampen the relationship between a stock and the overall market. Daily responses to news about a particular company are sometimes exaggerated, and adjust within the next few days to trade more in tandem with the overall market. On days when the overall market has little direction, stocks of some companies temporarily decouple from the market. All this could lead to erroneous results in measuring beta.

Let's look at an example. In the chart below, the y-axis represents the daily returns for Alcoa Inc., a large US firm focused on aluminum products (website). The x-axis shows the daily returns for the S&P500 index (here we are using SPY because many managers trade this ETF as a liquid proxy for the S&P500). The red line is the regression fit to this scatter plot. The classical way of estimating beta is simply using the slope of this red line, resulting in a measure of 1.63. This means that on average Alcoa shares will move 1.63 times as much as the S&P500. The company by its nature is cyclical and carries a significant amount of leverage, resulting in share price movements that are higher than the index (sometimes referred to as a "high-beta" stock).

In theory if someone is long $10 million worth Alcoa shares and decides to short $16.3 (10 x 1.63) million worth of S&P500 against it, the market exposure should be "hedged". That means the long/short position should exhibit the lowest possible volatility one could achieve by hedging with S&P500.

But most portfolio managers don't hold stocks for just a day. Using weekly as opposed to daily price data results in a beta of 2.05, a materially different outcome (see chart below). It means that in order to minimize the volatility over several days, one needs to short $20.5 million worth of S&P500 against $10 million worth of Alcoa – not $16.3 . The "daily beta", represented by the red line below would have resulted in higher losses during large market corrections than the weekly measure (green line).

Weekly data is based on each Thursday's close

Portfolio managers have numerous options for beta calculations. But one key factor for those who do not turn over their holdings daily is making sure to avoid using daily returns data for these measurements. Betas derived from daily stock prices could significantly underestimate the overall market exposure of a stock portfolio.

Voters Take Negative View of Labor Unions; Liberals in Favor of Strikes (Until Strikes Happen); Aging Population an Anti-Union Force?

Courtesy of Mish.

In what is decidedly a good thing for California as well as the nation at-large, a recent Field Poll shows California Voters Take Negative View of Labor Unions.

According to the latest Field Poll, California voter views of labor unions have taken a decidedly negative turn over the past two and one-half years. Whereas a March 2011 survey found voters by a four to three margin, believing that labor unions generally do more good than harm, opinions about this have shifted, with more voters now saying they do more harm than good, 45% to 40%.

The poll also finds Californians sharply divided on the question of whether public transit workers should be allowed to go on strike, with 47% feeling they should continue to have this right, while 44% believe they shouldn’t. Voters in the nine-county San Francisco Bay Area, who faced a paralyzing strike by its Bay Area Rapid Transit (BART) workers in both July and October and who face the possibility of a third strike, are more likely than voters elsewhere to oppose public transit workers having the right to strike.

Overall Results

click on any chart for sharper image

Demographic and Political Breakdown

Union Household Trends

  • Those on the take at the expense of everyone else (unions) are overwhelmingly pro-union.
  • Even among union households, note the sharp 13% increase in the percentage of people who say unions do more harm than good. 
  • By a 49-35 margin, nonunion households no say unions do more harm than good.

Primary Union Support

  • Union households
  • Los Angeles County
  • San Francisco Bay Area
  • Age Group 18-29
  • Latinos
  • Blacks

The age demographic is interesting. Are teachers pounding pro-union propaganda into kids heads from age six through college?

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Cowgirls Wearing Pink Shades

Courtesy of Tim Knight from Slope of Hope.


(Originally posted on Slope of Hope, hence the references to Slopers and SOH): Well, my fellow Slope-a-Dopes, I just could not bear sitting in silence any longer while all the blabbering bulls boast and gloat as they roast bear chestnuts over an open fire.  Enjoy your happy holidays highs, my bloated bovine butt-heads, as you sip your rosy bubbly and toast each other's good fortunes.   As for BDI, he went along briefly for a spectacular Santa sleigh ride to close out an otherwise dismal year with a BOOM.  Blow me momos, technos, and especially you trendos!

For the New Year, it seems that SOH, that last true refuge for pensive brooding bears, has been overrun with pompous bulls peddling & pumping a new 21st century high tech plateau of permanent prosperity, that would make even Irving Fisher's rose twittering cheeks blush.  I wonder if old Irving would have Linked himself In or posted his rip roaring 20s rosy market views on a pretty pink Facebook page?

As for The Idiot Savant, he sure does not smell the long stem roses.  Take off your pink shades and take a good sniff, smell the rotting rancid rot, Cowgirls!


Pink Shades # 1:  Europe is still deeply mired in an intractable recession, trapped in a crippling cluster-fucked currency union contraction with no way for the struggling periphery nations to pull themselves out of a dreadful debt death dive.  Don't believe the mindless misdirection manifested by the recent rosy European capital markets' marvelously manufactured momentum.  France just printed a near all time high unemployment rate. 


Pink Shades # 2:  The 10 year U.S. bond just closed above 3% and is most certainly trending for a continued move higher. Those sporting rose colored Ray Bans on their elongated noses, will tell you the economy is surely picking up, and thus, it is a welcome quite natural sign to see interest rates edge higher at this point.  What they won't tell you is that newly issued commercial bank loan volumes are near all time record lows.  Don't kid yourselves my pink pussy cats, interest rates are not being driven up by healthy demand pull forces in the real economy, but rather by the early signs of stagflationary supply push forces which always inevitably show up when too much money is being circulated in a monetary system.


Pink Shades # 3:  Super strength stagnating inflation is right around the bend. Its insipid effect always first appears in pesky peak priced fixed and financial asset of all kinds before it metastasizes into and onto the real economy on the ground. Here again take off your silly rose spectacles and smell the smelly stagflationary stench.  Rents, Food, Energy, Utilities, Education, Healthcare, TV/Internet/Smartphone bills, Entertainment tickets……etc, all hitting high water marks.  Ask yourselves, are fixed operating costs getting cheaper in your pink picket fenced palaces?

dior air light pink sunglasses-f80916

Pink Shades # 4:  The USD is skating on thin ice here, having recently broken the all important 80 level on its typically trusted treadmill DXY index. You really think a country that converts these degraded debased dollars in order to import over 70% of what it consumes will not see higher prices in the near future? You think China's appreciating and better yielding yellow Yuan will not increase the prices that your fat pink asses pay at the Walmart checkout counter?  What about that petro-dollar oil barrel price perpetually parked above $100 once again?  Attention all waddling whale Walmart shoppers!

Pink Shades # 5:  Despite the tiny timid taper, the FED’s balance sheet continues to grow exponentially with each passing month. Despite the frantically feeble fiscal budget agreement reached by the cowardly congressional clowns, the country continues to spend its way into oblivion with no end in site.  As interest rates inevitably rise, these terrific twin time bombs will be right back in your sights, front and center, quickly clearing up your fogged rose tinted lenses.


Pink Shades # 6:  Unemployment claims & benefits. The BLS tells us that countless copious crappy jobs are constantly being created and the unemployment rate is steadily heading down. Yet, unemployment claims have moved back up recently and the goofy Government goons are about to debate whether or not to resume the extended benefits program.  So, which is it?   Does this add up to you giddy ghey girly men wearing suave mauve designer shades? Seems to me that the problem is rather entrenched and not going anywhere anytime soon, as the middle class continues to lose ground from all sides.  Did you know that the number of 18-30 year olds living at home with their parents has never been higher in half a century.


Pink Shades # 7:  The Black Stone brick and mortar housing asinine asset abomination. Remember that virtual housing market our fiendish fraudulent financial friends blew up with their demented dubiously deranged debacle of mirage money mortgages that detonated last time around?  Well, that bogus busted bubble seems to have reemerged, reincarnated via the rabidly rapacious rapid re-inflation of free flowing FED funded subsidies, handed directly to the very same elite financial institutions whose unabashed greed preyed on us all the last time around. Everyone talks so re-assuredly about the guaranteed rental income streams these new real structures, as opposed to falsely structured investments, will genuinely generate.  Do these fabulous freeloading financial wizards really understand the actual fixed costs and real world care on the ground level, involved in maintaining hundreds of thousands of single family homes?  When interest rates head back up and the housing prices collapse will rents not follow suit?  Will the high prices they have set on these hard asset backed investments not head south in a hurry.  Did they not sell us on the exact same pipe dream with the so called safe and sound moronic MBS meme?  At the end of the day, have they not simply repriced and re-financialized the exact same assets which are dependent on the very same income stream generated from the busted american middle class.  Don't forget where the real value in housing comes from, it's not the standing structures themselves, but those that actually live in them that determine their value.  Speaking of houses, keep your eyes on existing home sales, they be going downtown in a hurry!


Pink Shades # 8: GDP & Inventories, smell the rot. There is no doubt that massive magnanimous monetary policy can generate real growth and create actual production. The question I have for you, my pinko friends, is can that fantastically force fed growth actually be sustained. If the new growth was achieved through the artifice of ZIRP & QE, will it not correspondingly dissipate in their absence?  Do you all really believe that we will magically arrive at escape velocity which will carry us forward even as the monetary fire hoses are turned off?  And, should they not turn off the emergency fire hoses, do you actually believe we will escape the powerfully potent physical universal laws of inflation and the inevitable upward push on interest that necessarily follows? The US public and private sectors are both leveraged to the hilt, loaded to the gills with unmanageable debt.  The free money has only served one purpose, and that is to avoid your rose colored world to be seen as the looming liquidity debt trap that it is, flashing a bright code red alert.  We are being lulled into a false sense of security my friends, and your cozy pink blankets and comforting lullabies will turn into your worst nightmares as soon as you remove your rose colored glasses.

I'm certain that most of my pretty in pink cowgirl equity cheer-leading friends will promptly pump their red white and blue USA, USA, USA  pompoms, singing and shouting their tried and true cheer; "the economy is NOT the market BDI!!! The economy is NOT the market you Idiot!!!".  Well, all I can reply to you, my fine fair weather friends, is that your future is so bright you will definitely need to wear your silly pink shades.  As for your idiot French friend, he will most assuredly be set up short by week's end, in anticipation of a steamy valentines date complete with a dozen pink roses.


BDI SOH's Idiot Savant

John Maynard Keynes:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.  As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

New Law in France: Limos Must Wait 15 Minutes Minimum Before Picking Up Rides

Courtesy of Mish.

Want to arrange a limo in France to take you to the airport or go on a private tour? Thanks to a new law in France, you have to wait a minimum of 15 minutes except at 4 or 5 star hotels.

The reason: taxis persuaded government that chauffeur driven limos are “unfair competition”.

Via translation from Les Echos, please consider Taxis against VTC: the conflict continues.

Note: “VTC” (Voiture de Tourisme avec Chauffeur) translates roughly as chauffeur driven touring car.

Starting January 1, limos must wait 15 minutes before they can pickup passenger. According the Minister of Crafts, Trade and Tourism and the Interior Minister, the delay helps distinguish the activity of VTCs from taxis.

The “Competition Authority” criticized the decree, emphasizing in particular that the radio taxis also operate on reservation. The “Competition Authority” claims the situation is “detrimental to consumers.”

I had to look this up because it’s the first I have heard of France’s “Competition Authority”.

Wikipedia explains “The Autorité de la concurrence (English: Competition Authority) is France’s national competition regulator.”

It’s shocking the Autorité de la concurrence actually translates its rulings and opinions into English. Here are some examples.

Opinions translated into English

What’s even more shocking than decisions translated into English is the fact that the Autorité de la concurrence appears to be on the right side of the issue (Does someone at the Autorité de la concurrence operate a VTC on the side?)

Regardless, Hollande’s Minister of Crafts, Trade and Tourism and the Interior Minister ruled in favor of taxis. But the taxis are not fully appeased either. Taxis don’t want competition from VTCs at all.

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Steve Keen (Briefly) Explains Why Janet Yellen Won’t See The Next Big One Coming

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

"Conventional economic theory says 'crisis don't happen' unless they are hit by an [outside] shock" exclaims Steve Keen, adding that numerous Nobel Prize winning economists have suggested that "capitalism is stable…" and "the problem of avoiding depressions has been solved for many decades."

But as Keen explains in this brief but extremely succinct interview, they are wrong – and simply won't (or can't) see the next one coming. "People in the public think economists are experts on money; but, in fact, they are experts in finding ways not to include money, debt, and banks in their models"

And yet, despite their failed forecasts and dismal 'scientific' models, we trust they can enter (and exit) the greatest monetary experiment in history with no bad outcome…

French Constitutional Court Approves 75% Tax on High Earners

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Almost a year ago, the French constitutional court ruled against Francois Hollande's triumphal blast into socialist wealth redistribution, with his proposed 75% tax rate on high earners, and so indefinitely delayed the exodus of the bulk of French high earners (even if some, like Obelix, aka Gerard Depardieu, promptly made their way to the country that has become the land of solace for all oppressed people everywhere, Russia) into more tax-hospitable  climes. That delay is now over, when earlier today the same court approved a 75% tax on all those earning over €1 million. The proposal passed after the government modified it to make employers liable for the 75% tax. As BBC reports, the levy will last two years, affecting income earned this year and in 2014.

Bloomberg has the details of the tax hike:

Under Hollande’s proposal, companies will have to pay a 50 percent duty on wages above 1 million euros ($1.4 million). In combination with other taxes and social charges, the rate will amount to 75 percent of salaries above the threshold, the court wrote in a decision published today.

“The companies that pay out remuneration above 1 million euros will, as expected, be called upon for an effort of solidarity on remuneration paid in 2013 and 2014,” the Economy Ministry said in an e-mailed statement.

Hollande, who once said he “didn’t like” the rich, announced the 75 percent tax in February 2012 as part of his presidential campaign to appeal to his Socialist base. It has become a symbol of his government’s record-high taxation rate.

And with the tax passage, the preparations for an exodus by all high earnings begin, first among the local football teams. BBC reports:

Football clubs in France went on strike earlier this year over the issue, saying many of France's clubs are financially fragile and say the plans could spark an exodus of top players who are paid huge salaries.

The Qatari-owned Paris Saint-Germain has more than 10 players whose pay exceeds 1m euros, including the Swedish striker Zlatan Ibrahimovic.

There has also been a chorus of protest from businesses and wealthy individuals who have condemned the tax – including film star Gerard Depardieu, who left the country in protest.

Polls suggest a large majority in France back the temporary tax.

Unlike many other countries in Europe, France aims to bring down its huge public deficit by raising taxes as well as some spending cuts. The highest tax rate in the UK is 45% and is applied to individuals.

While the numerous unintended consequences of this shock and awe tax hike will be amusing to watch in real time as this move will almost certainly be the long-awaited catalyst to push France into its long-predicted recession (to the benefit of countries like Belgium where the French uber-rich are already relocating to), one wonders if the drop in the value of French ultra-high end real estate will be offset by the soaring valuations of London's already "beyond housing bubble" home prices, and just what the local response will be now that domestic real estate is even more inaccessible to anyone but the wealthiest global oligarchs and billionaires (aside from the capital gains tax of course, which as we wrote previously, is about to be launched first in London, and then everywhere else).